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Reciprocity and matching frictions

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  • Dennis Wesselbaum

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Abstract

The ability of search and matching models to replicate stylized facts—such as volatilities and correlations—has been a center of attraction over the last couple of years. This paper introduces the Akerlof (Q J Econ 97:543–569, 1982 ) fair wage approach into an endogenous separation search and matching model. Within a RBC general equilibrium context, we show that the efficiency wage model outperforms its benchmark Nash bargaining pendant. In particular, the model generates the empirically observed volatilities in response to a productivity shock and replicates a strong Beveridge curve. Furthermore, we derive the Solow condition in a search environment and discuss the interactions of search and efficiency wage frictions. We show that search frictions create a wedge between the optimal wage/effort solution in the search and the competitive equilibrium. The efficiency wage consideration adds an additional margin to the firm's decision problem. As effort varies over the cycle, it changes the firm's optimal response to exogenous disturbances and amplifies the response to shocks. Copyright Springer-Verlag Berlin Heidelberg 2013

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Bibliographic Info

Article provided by Springer in its journal International Review of Economics.

Volume (Year): 60 (2013)
Issue (Month): 3 (September)
Pages: 247-268

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Handle: RePEc:spr:inrvec:v:60:y:2013:i:3:p:247-268

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Web page: http://www.springer.com/economics/journal/12232

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Keywords: Efficiency wages; Endogenous separations; Search and matching; E32; J41; J64;

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